I last bought an investment property back in early 1997. The market was clearly down at the time and the fact that my property was selling at a low price compared to its price history was face-slappingly obvious.
It was a big commitment. I had to invest a sizeable deposit and then finance the rest of the purchase price with a commercial mortgage. After that, I had to run the whole operation and make sure that the rent kept flowing in to cover the mortgage repayments. It is not, I would suggest, anything like passive investing. If you go into hands-on property ownership as a means to invest, such as in a buy-to-let situation, you will earn every penny of the returns you manage to squeeze out of the enterprise.
A murky macro-picture
But, to me, it is not an obvious time to invest in property right now. The property market is not bouncing along a gently undulating bottom like it seemed to be in 1997. I certainly wouldn’t risk so much on one big property investment now because the macroeconomic picture is less clear than it seemed to be in 1997. I see the property prices as likely to fall as they are to rise. And if they fall, it will likely manifest as a big drag on your overall returns from a buy-to-let investment over the next few years.
I’d be much more inclined to invest in some of the property companies listed on the London stock exchange in order to gain exposure to the property market today. A good example is Schroder European Real Estate Investment Trust (LSE: SERE), which is a United Kingdom-based company investing in European property, such as in Paris, Berlin, Stuttgart and Hamburg.
Today’s full-year results report revealed the firm acquired five properties in “high-growth” sectors and cities in the period, spending €52m to achieve an average net income yield of 8%. It also disposed of two retail properties raising €44.8m, which were delivering an average net income yield of 5%. I think that’s a great example of how the diversity of properties in the firm’s portfolio enables the fund managers to trade properties in the pursuit of higher returns, which is something that’s hard to do if you’ve invested in a single buy-to-let property. The market is illiquid when you own property directly yourself, and your trading costs will be prohibitively high compared to your relatively small investment. On top of that, there’s the sheer hassle of buying and selling property.
Diversification, liquidity and flexibility
However, by owning shares in a company like SERE instead, you gain all the advantages of diversification, liquidity and flexibility that the larger underlying business provides. Sir Julian Berney, the chairman of the board, said in the report that the firm had seen “another strong year” with growth in both net asset value (NAV) and income, “chiefly underpinned by the profitable disposal of lower yielding assets alongside new investment into higher growth industrial assets.”
With the share price close to 112p, the dividend yield runs near 5.9% and the price to tangible book value is around 0.82, suggesting decent value. I think the shares are attractive.